Definition
Any foreign (i.e., non-U.S.) corporation meeting either the income test or the asset test is a PFIC with respect to each shareholder when the test is met. PFIC status applies separately for each U.S. person owning shares, and also separately with respect to shares acquired at different times. PFIC status does not, itself, have any impact on the foreign corporation or foreign shareholders. The ''income test'' is met if 75% or more of the foreign corporation's gross income is passive income, defined asEffect of PFIC status
If a U.S. person receives income from a PFIC or recognizes gain from disposition of shares of a 1291 fund, such person is subject to a tax and interest regime. A shareholder may elect out of this regime (see QEF below). The regime applies only to any distribution or gain in excess of 125% of the average distributions for the prior three years. This regime is as follows: First, such income or gain (in excess of the 125%) is allocated pro rata to each year of the person's holding period for the particular shares. Next, the amounts allocated to prior years after 1986 are excluded from current year taxable income. Then tax is computed on amounts allocated to each prior year at the maximum rate of tax applicable to the type of taxpayer for such year (prior year tax). Then interest is computed on such prior year tax as if it were an underpayment of tax (interest charge). Finally, current year tax is increased by the aggregate of prior year tax amounts and interest charge amounts. The interest charges are computed using compound interest on an April 15 to April 15 basis. Given a sufficiently long holding period, the tax and back-interest will exceed 100%. However, the shareholder may avoid >100% tax by periodically selling and repurchasing his holdings, using the after-tax proceeds to repurchase shares. Shareholders of a PFIC (including a QEF) are eligible for foreign tax credit with respect to the current and deemed prior year taxes, including the deemed paid credit for 10% corporate shareholders of the PFIC.Qualified Electing Fund (QEF) election
Each U.S. person owning shares of a PFIC may elect to include their share of the ordinary income and net capital gains of the PFIC(similar to shareholders of a mutual fund), provided that the PFIC issues the necessary PFIC annual information statement. The PFIC annual information statement is a rough equivalent of Form 1099. This election is effective for the year in which the election is made and all subsequent years. The tax and interest regime is avoided to the extent this election applies. This election helps U.S. persons holding shares of a PFIC by treating the income earned through the PFIC similar to other US entities. For example, shareholders of corporations are usually subject to U.S. tax only when the income is distributed. In addition, shareholders of a U.S. mutual fund are subject to tax on their pro rata share of ordinary income and capital gains of the mutual fund. QEF status applies only to the shares of a particular shareholder acquired during a tax year for which the QEF election was in force, assuming that the QEF election remains in place throughout the holding period. Such status does not apply to other shareholders or to persons acquiring the particular shares. QEF status fully avoids the tax and interest regime only if it is effective from the beginning of the share's holding period. If a shareholder elects QEF status for particular shares at a date later than the acquisition date, one of three additional elections may be made to "purge" PFIC status for prior years. The shareholder may make one of two gain recognition elections (deemed sale and mark to market) or, if the shareholder is a corporation, a deemed dividend election. In each case, the gain or deemed dividend recognized under the election is subject to the tax and interest regime.Mark to market
A shareholder of a PFIC may also elect each year to recognize gain or loss on the shares as if he, she or it had sold the PFIC shares at fair market value, although gains are taxed as ordinary income. Losses generate ordinary income deductions to the extent they reverse prior gains, on a share-by-share basis, after which they are claimed on US schedule D. Such election is available only for shares the market value of which is readily determinable (e.g., regularly traded shares). Shares subject to this election are not subject to the tax and interest regime. Also, this election is independent of prior PFIC elections (i.e. QEF or Sect 1291 election). for example: If stock X was purchased in 2007 for $100, has a FMV on December 31, 2011, of $120, and no PFIC forms were filed until 2011 (when Sect 1296- Mark-to-market- election was made), no PFIC filings would be needed for the prior years as long as distributions were less than 125% and no capital gains occurred. For the current year, 8621 would be filed using Mark to market and the ordinary income would be $20.Coordination with CFC rules
U.S. Shareholders (generally 10% or more owners) of a controlled foreign corporation (CFC) are not subject to the tax and interest regime with respect to any share which was not a share of a PFIC at any time before 1997. Such shareholders are, instead, subject to the CFC rules.Note that a U.S. person owning shares of a foreign corporation which were held prior to 1997 faces the risk that the CFC was a PFIC before 1997. See note above.Reporting and making elections
Each U.S. person owning shares of a PFIC is required to file IRFurther reading
* Tax-Charts.comReferences
{{DEFAULTSORT:Passive Foreign Investment Company International taxation Taxation in the United States